Kenya s Real Estate Sector Retail Report Cautious Optimism in the Face of Turbulence 09 th October, 2017
Table of Contents I. Introduction to Cytonn Investments II. III. Overview of Real Estate in Kenya Kenya s Retail Report A) Introduction B) Trends in the Retail Sector in Kenya C) Retail Space Supply in Kenya IV. Retail Market Performance A) Performance by Nodes B) Performance by Regions C) Performance by Class D) Retail Market Opportunity V. Market Sentiments A) Retailers Sentiments on the Market VI. Retail Market Opportunity and Outlook 2
I. Introduction to Cytonn Investments 3
What We Stand For Our Mission We deliver innovative & differentiated financial solutions that speak to our clients needs Our Values People Passionate and self-driven people who thrive in a team context Excellence Delivering the best at all times Client Focus Putting clients interest first at all times Our Vision To be Africa s leading investment manager by consistently exceeding clients expectations Entrepreneurship Using innovation and creativity to deliver differentiated financial solutions Accountability We take both corporate and personal responsibility for our actions Integrity Doing the right things 4
Strategy is straightforward just pick a general direction and implement like hell Jack Welch 5
About Us Cytonn Investments Management Plc is an alternative investment manager with presence in East Africa, Finland and the US. We provide investors with exposure to the high growth East Africa region. Our investors include global and local institutional investors, individual high networth investors and the diaspora. We also service retail investors through our Cytonn Cooperative FACT FILE 82 bn Over Kshs. 82 billion worth of projects under mandate Five offices across 5 250 2 continents Over 250 staff members 10 10 investment ready projects A unique franchise differentiated by: Independence & Investor Focus Alternative Investments StrongAlignment Committed Partners Focused on serving the interest of clients, which is best done on an independent platform to minimize conflicts of interest Specialized focus on alternative assets - Real Estate, Private Equity, and StructuredSolutions Every staff member is an ownerin the firm. When clients do well, the firm does well; and when the firm does well, staff do well Strong global and local partnerships in financing, land and development affiliate 6 Overview of TheFirm 6
Why We Exist Africa presents an attractive investment opportunity for investors seeking attractive and long-term returns. Despite the alternative markets in Africa having high and stable returns, only a few institutional players serve the market. Cytonn is focused on delivering higher returns in the alternative markets, while providing the best client service and always protecting our clients interests. WE SERVE FOUR MAIN CLIENTS SEGMENTS: WE INVEST OUR CLIENT FUNDSIN: Retail segment through Cytonn Co-operative membership High Net-worth Individuals through Cytonn Private Wealth East Africans in the Diaspora through Cytonn Diaspora Global and Local Institutional clients Real Estate Private Equity Fixed Income Structured Solutions Equities Structured Solutions We collect funds from our clients We invest them in high growth opportunities We deliver the best possible returns 7 Overview of TheFirm 7
Our Business Where We Operate EUROPE NORTH AMERICA AFRICA Our Business Lines Investments Alternative investment manager focused on private equity and real estate RealEstate We develop institutional grade real estate projects for investors Diaspora We connect East Africans in the diaspora to attractive investment opportunities in the region Technology We deliver world-class financial technology solutions Co-operative Provides access to attractive alternative investment opportunities for members 8 Overview of TheFirm 8
Our Solutions To unearth the attractive opportunity that exists in alternative markets in Africa, we offer differentiated investment solutions in four main areas: HIGH YIELD SOLUTIONS REAL ESTATE INVESTMENT SOLUTIONS Our expertise in the alternative markets enables us to offer investors high yielding investments. Our robust credit analysis coupled with our quick dealing capabilities, our extensive research coverage and our innovative structuring helps to ensure consistent and above market returns to investors. Our comprehensive real estate capabilities enable us to find, evaluate, structure and deliver world-class real estate investment products to our investors in the East African region. Our capabilities include fundraising, market research and acquisition, concept design, project management and agency and facility management. PRIVATE REGULAR INVESTMENT SOLUTIONS PRIVATE EQUITY Attractive returns in the alternative segments have typically been accessible to institutional andhigh net-worth investors. Our regular investment solutions provide access to the alternative investments to members of the Cytonn Co-operative. We seek to unearth value by identifying potential companies and growing them through capital provision, partnering with management to drive strategy and institutionalizing their processes. Our areas of focus are Financial Services, Education, Renewable Energy and Technology Sectors. 9 Overview of TheFirm 9
Our Products We serve three main types of clients namely, high net-worth individuals, institutions and retail, each with diverse needs. Below are the suitability criteria for the various products. INSTITUTIONALCLIENTS HIGH NETWORTH INDIVIDUALS (HNWI) RETAILCLIENTS Cash Management Solutions Regular Investment Plan Education Investment Plan Regular Investment Solution Co-op Premier Investment Plan Land InvestmentPlan Real Estate Development Real Estate Developments Sharpland 10 Overview of TheFirm 10
Our People If you could get all the people in an organization rowing the same direction, you could dominate any industry, in any market, against any competition, at any time. Patrick Lencioni We are focused on one agenda: THE CLIENT 11 Overview of TheFirm 11
Board of Directors To ensure that we remain focused on the clients interests, we have put in place proper governance structures. We have a board of directors consisting of 11 members from diverse backgrounds, each bringing in unique skill-sets to the firm. 12 Overview of TheFirm 12
Board of Directors, continued 13 Overview of TheFirm 13
II. Overview of Real Estate in Kenya 14
Real Estate in Kenya Real estate sector in Kenya expected to continue growing on the back of growing middle class, and the entry of institutional developers/financiers and government incentives Macro-economic Contribution High Returns Recent Developments Market Outlook The real estate sector contributed to 8.4% of Kenya s GDP in 2016, and grew by 8.8% in 2016 from a 7.2% growth in 2015.This is according to the KNBS Economic Survey 2017 A relatively stable political environment, as well as favourable macroeconomic conditions leading to sustained GDP Growth and a stable exchange rate have led to positive development in the sector Real estate has consistently out performed other asset classes in the last 5 years, generating returns of 25.0% p.a., compared to an average of 12.4% p.a. in the traditional asset classes Residential units generate an average rental yield of 5.6%, while commercial and retail sectors generate an average yield of 9.2% and 9.6%, respectively in Nairobi The real estate sector which was previously dominated by individual developers has seen entry of more institutional developers such as SACCOs, private equity firms and foreign institutions Evolution of structured products, REITS in the capital markets, as a way to raise funding and exit real estate developments, is likely to attract more institutional investors The government has also introduced various initiatives such as the scrapping of NEMA application fees, land title search fees and a reduction on corporate tax from 30% to 15% for housing developers who take on projects with a 100 or more units We expect continued growth on the back of improved macroeconomic conditions, sustainable high returns, and a growing middle class The industry however continues to face challenges such as the unfavourable interest rate environment with the CBK s interest cap law that have seen private sector credit growth from a high of 25.8% in June 2014 to 1.5% recorded in August 2017 15
Introduction to Real Estate in Kenya RE Contribution to GDP Real Estate and construction sectors contribution to GDP has been increasing from 10.5% in 2000 to 12.6% in 2010 to 13.8% in 2016 2000 2010 2016 Agriculture 31.3% 23.7% 23.1% Manufacturing 17.0% 11.5% 10.4% Wholesale & Retail Trade 16.5% 7.1% 7.4% Hospitality & Tourism 16.5% 1.7% 0.9% Real Estate & Construction 10.5% 12.6% 13.8% Source: KNBS Economic Survey 2017 16
17 III. Kenya s Retail Report
Executive Summary Increased supply affecting returns in the retail sector with yields in Nairobi declining by 0.4% points from 10.0% in 2016 to 9.6% in 2017 We carried out a research on the retail industry in Nairobi & metropolitan, Eldoret, Mombasa, Kisumu and Mt Kenya regions. The Report aims to inform investors and retailers on the current state of the retail market in Kenya in terms of supply, demand, drivers, challenges and performance in 2017 and compare with 2016 performance to gauge trends and hence outlook From the research and analysis, as at 2017, Nairobi has a retail space of approx. 5.6 mn SQFT, a 41.6% increase from 3.9 mn SQFT in 2015/16, as a result of the opening of malls such as Next Gen Mall, Two Rivers, Ciata City Mall, Rosslyn Riviera among others which added cumulative retail space of 1.7 mn SQFT The retail sector has average yields of 8.3%, and occupancy rates of 80.2%, a decline from last year s 8.7% and 82.9%, respectively, mainly due to increased supply and a tough economic environment Nairobi is the best performing region with average rental yields of 9.6% a 0.4% points decline from 10.0% yield in 2015/2016 Destination malls are the best performing typology with an average rental yield of 10.3%, compared to a market average rental yield for the retail sector of 8.3% The sector has revolutionized with developers focusing on international grade malls due to the influx of foreign retailers such as Game and Carrefour into the country; with brick and mortar retailers facing competition from growing online shops as consumer s tastes and preferences lean towards convenience and better international quality The outlook for the real estate sector is positive, as it still offers higher returns compared to other asset classes with average returns of 25.0% The retail sector offers relatively high returns compared to other sectors like residential which offer 5-7.0% yields. Nairobi is sufficiently supplied with retail space factoring in the incoming supply in the next 2-3 years. The opportunity is thus in other regions such as Mombasa which has low supply both current and in the pipeline 18
Retail Sector Performance Summary In 2017 rental yields declined by 0.4% points to 8.3% from 8.7% in 2016, as a result of a 9.0% decline in asking rents and a 2.7% points decline in occupancy rates Item FY 2016 2017 YTD Y/Y Asking Rents (Kshs/SQFT) 154.9 141.0 (9.0%) Occupancy (%) 82.9% 80.2% (2.7%) Average Rental Yields 8.7% 8.3% (0.4%) The retail sector s performance softened during the year, with rental yields declining by 0.4% points to 8.3% from 8.7%, as a result of declines in asking rents and occupancy levels, which reduced by 9.0% and 2.7%, respectively The growth in vacancy rates is attributed to the growth on mall space supply, which has increased by 41.6% year on year against a stagnated demand for the same and the tough operating environment characterized by constrained credit supply, which reduced expansion efforts by retailers Source: Cytonn Research 19
Kenya s Retail Report Cautious Optimism in the Face of Turbulence Retail sector performance softened with yields declining by 0.4% points from 8.7% to 8.3% as a result of increased supply and a tough operating environment Value Area Summary Effect on Retail Market Nairobi, Mombasa, and Kisumu counties have Increased supply in Nairobi County has led to developers the largest mall space supply with market focusing on the Nairobi Metropolitan and other counties, shares of 59.4%, 10.0% and 7.4%, such as Kiambu, Machakos and Nakuru, Increasing respectively. Nairobi s supply is expected to The spurge in mall spaces have resulted in ghost malls as Supply grow with a 3-year CAGR of 7.3% CAGR to retailers moveonto the next best mall 6.90mn Sqft in 2020 from 5.6mn Sqft in 2017 Investors are also increasingly developing international grade mall space so as to attract foreign retailers Returns Market Sentiments As of 2017, the retail sector offers attractive returns of 8.3%.. Nairobi and Kisumu outperform other regions with average rental yields of 9.6% and 9.1%, respectively, while Eldoret area has the lowest average rental yield of 6.6% Despite the financial troubles faced by Nakumatt and increased competition from foreign retailers, retailers have a positive outlook for the sector and its potential for growth especially with the adoption of technology This continues to attract developers into the retail market, which has resulted in a growth of retail space at a 10-yr CAGR of 13.7% Despite the higher rental yields in Nairobi, the city has sufficient retail space supply factoring in incoming supply in the next 2-3 years and thus investment opportunity is in other regions such as Mombasa which has relatively low We expect less development of brick and mortar malls and more growth in terms of expansion from foreign retailers supply This has led to increased use of technology in the retail sector with stores like Naivas investing Kshs 180mn on an e commerce platform to diversify their product offering and customer experience 20
21 A) Introduction
Introduction The research aims to provide an insight into Kenya s retail real estate market Retailing is a distribution channel function, where one organisation buys products from supplying firms or manufactures them and then sells these directly to consumers Kenya s retail market is attracting increased interest from local and international investors as witnessed through expansion of local stores, entry of international retailers and increased construction of malls Market studies rank Kenya as the country in Sub-Saharan Africa with the largest shopping centre space after South Africa, and with the largest development pipeline While kiosks, market stalls, supermarkets and cosmetic shops are still the most prevalent stores, the formal retail market has grown with several malls being constructed to offer consumers the convenience of a one-stop shop We therefore carried out this study with an aim of providing insight into Kenya s retail market market and provide an opinion on the following: Supply of retail space in Nairobi Metropolis, Kisumu, Mombasa, Nakuru, and Mt Kenya regions Trends and recent developments in the retail sector Prevailing market rents, yields, occupancy and uptake of retail space Consumer spending habits Retail market outlook Investment opportunity in retail real estate 22
Factors Driving Growth of the Retail Market in Kenya Kenya s growing middle class has been the driving force behind growth of retail sector Positive Demographics Kenya s high population growth of 2.6% p.a against world s 1.2% has created demand for retail good and services. The rising middle-class has increased purchasing power as well as varying tastes and preferences for different goods and services Kenya s urbanization rate at 4.4%, which is relatively high compared to the world s 2.1%, has resulted in a need for retail stores and entertainment spots for the youth Foreign Investment Due to the current growth of the Kenyan economy, that has averaged at over 5.1% for the past 5 years, the country has received varied interests from international industry players Multinationals such as Johnsons & Johnsons, Volkswagen & Swavroski, among others, have set up shop in the country with international retail developers such as Actis, Azaelia Holdings and Avic CATIC, being behind the country s largest malls such as Garden City, The Hub and Two Rivers Malls, respectively Infrastructural Development The country has seen a rapid improvement of its infrastructure making it accessible for investors to venture in otherwise inaccessible areas As a result, malls have cropped up along major Kenyan routes, for instance, malls such as Garden City along Thika Road, NextGen along Mombasa Road and Sarit Centre in close proximity to Waiyaki way Digitalization of cash systems & popularity of mobile wallets, bar coding to help in security measures and a high internet penetration rate of 58.0% against the world s at 42.0% have aided in growth of e-retailing E-commerce As a result, successful online shops such as Jumia, Kilimall, Rupu, just to mention a few are cropping up with shops like Jumia recording an increase of 366.0% in mobile sales between 2015/2016 As per the KNBS Economic survey, internet and mobile money subscriptions stood at 58.8% & 70.5% in 2016, an increase from 54.2% and 60.6% in 2015, respectively 23
Factors Affecting Supply of Retail Space High financing costs negatively affect retail space development, but improved infrastructure is opening up satellite towns for development Availability of Land Availability of development land has been low within towns and urban centres resulting in relatively high prices Developers are however shifting focus to Satellite Towns such as Kiambu, Rongai, and Kitengela, where large tracts of land are available and relatively affordable, thus resulting in increased supply Access to Funds Malls being large developments require a huge capital outlay. Lack of proper funding for developments has resulted in excessive debt funding Lack of adequate funding has also resulted in stalling of projects, and extended project time frames, thus increasing financing and for existing outlets, operation costs. This has resulted to some outlets accruing huge debts that are paralyzing to normal business operation Competition Spurting of malls in the same region has resulted in stiff competition between malls. This is likely to result in decreased mall construction in areas such as Thika Road and Limuru Road Mall developers face the risk of obsolescence of retail space, thus losing tenants to newer malls. They therefore have to continually revamp their malls so as to meet the tenants and consumers expectations Infrastructure Improved infrastructural developments such as improved roads, the SGR, electrification, and ICT have opened up new development areas such as Athi River and Ruaka Completion of the Thika Super Highway has resulted in an influx of malls along the busy highway, while the Northern Bypass has influenced growth of Ruaka Town and construction of the Two Rivers mall Fragmented Markets Kenya s retail market is mostly concentrated in urban areas due to higher purchasing power and good infrastructure. In addition, poor infrastructure in rural areas makes accessibility difficult Rural areas therefore continue to have low retail space supply due to inaccessibility and low purchasing power 24
Factors Affecting Demand For Retail Space Location, security and competition significantly affect the demand for retail space in Kenya Location Ease of access results in increased consumer traffic, making the location attractive to retailers Proximity to urban areas, densely populated areas or high-end settlement will result in a large consumer base for retailers products Security Retailers in the country estimate losses incurred through theft and shoplifting being worth Kshs 3 bn every year. In addition, retailers risk massive losses during times of political, social unrest and terrorism, with supermarkets being the worst hit Retailers are therefore less likely to seek space in areas affected by tension and insecurity Competition A surge in malls in the capital has led to the evolution of ghost malls as the supply supersedes demand, attributed to inflation and an unfavourable lending environment On the other hand, expansion of formal retail chains such fashion retail stores has been difficult due to competition from informal retailers of second hand clothes, also called mutumba Online Retail The shift from shopping physically from retail stores to making orders online, may result in reduced demand for retail space in the long run as retailers will opt to save on costs for leasing retail space According to Jumia, online sales in Kenya increased to 58.0% in 2015. from 11.0% in 2011 However, Kenyans still prefer physical shopping due to insecure delivery systems, cyber crimes and lack of proper physical addresses especially in rural areas necessitating the need for retail stores 25
B) Trends in the Retail Sector in Kenya 26
Trends in Kenya s Retail Sector Brand consciousness, green malls, entry of international retailers and online shopping are some of the key trends in the retail market in Kenya in 2017 Brand Consciousness Green Malls The Kenyan retail space has seen a significant change as a result of evolving consumer lifestyles Kenyans are more connected to global trends, which has resulted in popularity of foreign products evidenced by the rise of international shops in fashion, beauty and food sectors such as Maybelline, Mocha, clothing stores such as LC Waikiki, Woolworths are setting up shop in Kenya in order to tap the market More retail centres are going green as a way of being environmentally friendly and also offer a safer shopping environment which is expected to increase occupancy rates. Examples of green malls in Kenya are The Garden City and Rosslyn Riviera with Garden City getting the Leadership in Energy and Environmental Design (Leed) Gold pre-certification award by United States Green Building council Entry of International Retailers Online Shopping According to oxford Business Group, Kenya s formal retail penetration is 35.0% making it the second highest in Africa, after South Africa s 60.0%, which has served as an incentive for foreign retailers Foreign retailers such as Carrefour, Botswana s Choppies and Game have been able to penetrate the market with considerable success further supported by a widening middle class According to Economic Survey 2017, internet mobile penetrations as at 2016 stood at 58.8% and 70.5%, an increase from 54.2% and 60.6% in 2015, respectively This has led to the growth of e-retailing with online shops such as Jumia, and social media growing rapidly. This has further been enabled by mobile wallets gaining popularity The popularity of online shops might result in reduced popularity of brick & mortar malls 27
Recent Developments Nakumatt and Uchumi account for 73.0% of all Kenyan retailers supplier debts, as of 2017 Retailers expansion strategies in a bid to tap into the booming e-retailing industry, Naivas Supermarket which opened its 35 th store as anchor tenant in Ciata City mall, announced its new venture into a Kshs. 180.0 mn ecommerce platform that will see goods get delivered countrywide using their system, Naivas Pay, while also contesting against Carrefour for space previously occupied by Nakumatt in Thika Road Mall This is due to an increase in demand for convenience by the Kenyan shopper. According to Communications Authority of Kenya (CAK) courier items sent locally grew 59.3% y/y as of June 217 Fall of Retail Giants Nakumatt previously the leading retail store in Eastern Africa has recently undergone severe cash crunch leading to closures of at lease three retail outlets in Uganda and shutting down four of its flagship branches in Kenya by October 2017, due to accrued supplier debts that accumulated to Kshs 30 bn by 2017. Uchumi suffered the same fate in 2016 owing to supplier debts that had accrued to Kshs 2.8 bn. The challenges facing the retailers have been as a result of: Reduced credit advancement to private sector following the CBK Interest rate legislation High inflation rates which hit an annual high in May 2017, at 11.7% Poor governance in the family-led business, lack of wise expansion strategies and internal losses Entrance of international retailers who get the advantage of tax holidays Poor supply chain management which. As per The Ministry of Industry and Trade, Uchumi and Nakumatt accounted for 73.0% of the total debt owed by Kenyan retailers to suppliers 28
Recent Developments The retail sector is poised for more investments by foreign investors What s Next Nakumatt announced a proposed merger that would see the retailer sign a multibillion deal with Tuskys. If successful, the retailer will be able to access Tuskys suppliers and will help end their financial distress and restore the retailer to full operations and inventory levels. The Central Bank of Kenya may revise the interest rates legislation due to its negative effect on the country s economy, especially in the private sector The retail sector is thus in Kenya is likely to experience a paradigm shift with international retailers such as Carrefour making inroads to the Kenyan market taking advantage of the gap caused by the crisis and malls replacing supermarkets as anchors by other retailers such as fast-food stores which have high footfall 29
30 C) Retail Space Supply in Kenya
Retail Space Supply Nairobi Growth Rates Retail space in Nairobi will grow to 6.9 mn SQFT by 2020, at a 13.7% CAGR Nairobi Mall Supply Growth since 2010 8.0 7.0 6.0 CAGR 13.7% 5.38 5.59 5.82 6.51 6.90 5.0 3.95 4.0 3.0 2.0 1.89 2.28 2.52 3.04 3.14 1.0-2010 2011 2012 2013 2014 2015 2016 2017 2018(F) 2019(F) 2020(F) Nairobi currently has a mall space supply of approximately 5.6 mn SQFT, a having grown from 1.9 mn SQFT in 2010 a 7-yr CAGR of 16.9%, making it the largest shopping centre in Sub-Saharan Africa after South Africa, which has approx. 23.0 mn SQFT of mall space The increase in mall space has been largely driven by intensive investment by mall developers seeking to tap into the widening middle class whose purchasing power has been on a rise and have an appetite for sophisticated lifestyles, as well as infrastructural development We project that by 2020, the retail space supply will have grown to over 6.9 mn SQFT, which is a 10-yr CAGR of 13.7%, with the addition retail space such as the Kileleshwa Mall, Cytonn Towers, The Karen Water Front, the new Sarit Centre expansion, among others Source: Cytonn Research 31
Retail Space Supply Nairobi Current Distribution by Nodes Kiambu & Limuru Road Area has the largest mall space with a 17.0% market share Westlands 9% Thika Road 13% Satellite Towns 13% Ngong Road 10% Nairobi Distribution CBD 1% Eastlands 12% Mombasa Rd 12% Kilimani 5% Karen 8% Kiambu & Limuru Road 17% Kiambu & Limuru Road Area and Thika Road nodes have the largest mall space with 17.0% and 13.0% market share, respectively This is due to the opening of the Two Rivers mall on Limuru Road earlier this year The areas with largest supply have good road connectivity and also serve middle and high end income suburbs, making them attractive investment opportunities for mall investors CBD and Kilimani, Kileleshwa & Lavington areas had the least market share, attributable to lack of development land in the CBD and previously-strict zoning regulations in Kilimani, Kileleshwa & Lavington areas Source: Cytonn Research 32
Retail Space Supply Nairobi Distribution by Nodes in the Next 3-Years Kiambu & Limuru Road will still have the largest market share, at 16.0% Satellite Towns 14% Mall Supply in the Next 3 Years CBD 1% Eastlands 11% Kiambu & Limuru Road will still have the largest mall space, with a total market share of 16.0% Kilimani s contribution to Nairobi s total supply will Westlands 12% Karen 10% increase to approx. 9.0% due to upcoming malls such as Kileleshwa mall, Cytonn Towers and Fairview Plaza malls Satellite Towns, which as per our sample includes areas like Kiambu and Machakos, will have the second largest Thika Road 10% Kiambu & Limuru Road 16% market share at 14.0% of the Nairobi Metro s mall supply due to upcoming malls like the Kiambu Mall in Kiambu Town and Crystal Rivers in Athi River Ngong Road 8% Mombasa Rd 9% Kilimani 9% Other upcoming malls include Karen Waterfront, Mountain View mall on Waiyaki way, and Comesa mall in Eastlands Source: Cytonn Research 33
Retail Space Supply in Nairobi Metropolitan Area Machakos County has the largest deal pipeline with 200,000 SQFT of retail space under construction 700 600 500 400 300 200 100-149 471 Satellite Towns Deal Pipeline 000 SQFT 200 260 245 Kiambu Machakos Kajiado Completed Pipeline Kiambu County has the largest mall space supply with 471,000 SQFT of mall space and a deal pipeline of 149,000 SQFT due to the upcoming Kiambu Mall The County enjoys a large urban population and has been ranked the wealthiest county in Kenya with a GDP per capital of USD 1,785 which is 22.7% higher compared to the country s which is USD 1,455, as well as a booming real estate market Machakos County has a large development pipeline with the construction of The Crystal Rivers Mall underway bringing the total mall space in the county to 460,000 SQFT Development in Machakos County is supported by improving infrastructure, affordable land and over 51.8% of its population being urban From our sample, Kajiado County, however, has no deal pipeline for the near future and is served by Maasai Mall, Milele Mall and Red Heron in Rongai, Ngong and Kitengela, respectively Source: Cytonn Research 34
Retail Space Supply in Kenya GDP Per Capita Vs Supply Kiambu has the least retail space per 1,000 people at 45 SQM per person Retail Space Per 1000 Urban Persons Against GDP Per Capita 2,000 1,500 1,000 500 0 1,785 145 149 1,466 1,413 1,081 935 913 674 643 625 45 Kiambu Kajiado Nakuru Nairobi Mombasa Machakos Mt Kenya Uasin Gishu Kisumu 160 140 120 100 80 60 40 20 - Source: Cytonn Research GDP Per Capita Retail Space per 1000 Urban Persons Kenya has a GDP Per Capita of USD 1,455. However, as per the 2015 World Bank report on national and subnational economic growth in Kenya, Kiambu was listed as the richest county in Kenya with a GDP per capital of USD 1,785. However, the county has the least retail space per 1,000 persons at 45 Sqm per 1,000 urban persons, showing that it still has potential for retail growth Nairobi and Kisumu had the highest retail space per a 1,000 urban persons at 145 and 149 sqm per 1,000 persons, respectively, which is low compared to other counties that ranked higher such as Kajiado and Mt Kenya Source: Word Bank Bright Lights Big Cities Policy Paper 2015 35
Retail Space Supply in Kenya Regional Distribution and Pipeline Kisumu has the largest mall space in Kenya after Nairobi with 920,000 SQFT of retail space 1000 800 600 400 200 0 920 160 680 200 209 574 560 Regional Mall Space '000' SQFT 160 350 322 315 260 255 245 Kisumu Mombasa Nakuru Kiambu Trans Nzoia Mt Kenya Kakamega Machakos Uasin gishu Kajiado Narok 200 282 120 120 Current Space Pipeline Kisumu, Mombasa and Nakuru have the largest mall supplies in Kenya after Nairobi with 0.9 mn, 0.7 mn and 0.6 mn SQFT, respectively The three are the biggest towns in Kenya after Nairobi hence a high urbanized population at 52.1%, 100.0% and 45.4%, respectively. Additionally, they are tourist towns and thus attracts large numbers of local and international visitors Uasin Gishu, Kiambu, Machakos and Nakuru regions have the largest deal pipelines, attributable to the fact that they are fast growing regions, especially in the real estate sector Source: Cytonn Research 36
Retail Space Supply in Kenya Regional Distribution by Class Neighborhood malls are the most common in Kenya accounting for 51.0% of the total mall space in Kenya 120% 100% 100% Regional Mall Distribution Neighbourhood malls have the highest market share with 51.0% while community and destination malls take up 45.0% and 4.0% of the market share, respectively 80% 60% 56% 55% Nairobi is the only county with all types of malls, accounting for 56.0%, 55.0% and 100.0% of the total market share of neighbourhood, community and destination malls, respectively 40% 20% 0% 20% 14% 12% 14% 8% 9% 9% 4% Nairobi Eldoret Kisumu Mombasa Mt. Kenya Neighborhood Community Destination Neighbourhood and community malls are the dominant types with a presence in all counties which is attributable to the fact that they attract the middle and lower middle income groups due to their affordability in products offered as well as construction costs in comparison to regional malls Source: Cytonn Research 37
38 IV) Retail Market Performance
39 A) Performance By Nodes
Retail Sector Nodes in Nairobi Karen, Westlands, Kiambu Road and Thika Road are the main retail nodes in Nairobi In our sample; Kiambu Road includes Limuru Road Kilimani,Kileleshwa & Lavington includes Kilimani,Kileleshwa & Lavington and their environs, Ngong & Lang'ata Road covers area between Community, Lang ata Road up to Dagoretti Corner Westlands includes Parklands and Mountain View 40
Nairobi Metropolitan Area Retail Market Performance Westlands and Karen were the best performing retail suburbs in Nairobi with average rental yields of 13.5% and 11.2%, respectively Location Rent 2017 Occupancy 2017 Rental Yield 2017 Occupancy 2016 Rental Yield 2016 Change in Occupancy Y/Y Change in Yield Y/Y Westlands 235 91.0% 13.5% 92.0% 12.3% (1.0%) 1.2% Karen 206 96.3% 11.2% 96.3% 12.5% 0.0% (1.2%) Kiambu & Limuru Road 216 78.2% 10.6% 90.0% 10.1% (11.8%) 0.4% Kilimani, Kileleshwa and Lavington 181 87.0% 10.3% 86.0% 10.6% 1.0% (0.3%) Thika Road 199 75.3% 8.7% 89.3% 10.0% (14.0%) (1.3%) Ngong Road 171 81.8% 8.7% 93.3% 9.7% (11.6%) (0.9%) Mombasa Road 180 68.8% 8.3% 83.3% 8.2% (14.6%) 0.1% Satellite Towns 130 82.5% 7.7% 88.3% 9.3% (5.8%) (1.6%) Nairobi Eastlands 149 61.8% 6.1% 85.0% 7.5% (23.3%) (1.4%) Average 185 80.3% 9.6% 89.3% 10.0% (9.0%) (0.4%) Retail in Nairobi has relatively high yields of 9.6% on average compared to other real estate themes such as the residential sector with yields ranging from 5% 7% and commercial office with average rental yields of 9.2% In 2017, Nairobi s performance softened across all submarkets with yields declining by 0.4% points, as a result of increased supply which led to a 9.0% points y/y from an average of 89.3% to an average of 80.3% with Nairobi Eastlands having the largest decline in occupancy levels at 23.3% points followed by Mombasa Road and Thika Road with 14.6% points and 14.0% points declines in occupancy levels, respectively These These nodes got significant amount of retail spaces between 2016 and 2017 with malls such as K Mall and Southfield in Nairobi Eastlands adding 220,000 SQFT, Next Gen Mall adding 490,000 SQFT of retail space in Mombasa Road and Unicity adding 115,000 SQFT on Thika Road Source: Cytonn Research 41
Performance by Nodes Westlands was the best performing submarket, with a yield rate of 13.5% and an occupancy of 91.0% Westlands Westlands was the best performing submarket with high yields of 13.7% and occupancy rates of 91.0% attributable to its high rents as a result of proximity to CBD and its being an upper middle income neighborhood Karen Karen was the second best performing submarket, with a yield rate of 11.2% and an occupancy of 96.3%. This is attributable to its affluent population, prime rents and lower competition compared to low end areas, the malls compete against second tier supermarkets Kiambu & Limuru Road Average yields increased to 10.6% from 2016 s 10.1% attributable to to its changing status into one the fastest rising residential areas and apt location along Nairobi s periphery. The node also serves high end markets such as Muthaiga, Runda and Ridgeways, attracting premium rents Kilimani, Kileleshwa & Lavington The area performed fairly well with average occupancy rates of 87.0%, an increase from 86.0% in 2016 and average yield of 10.3% which was a decline form 2016 s 10.6%, which could be attributed to the area s dominance by aged malls Ngong & Lang'ata Road Ngong & Lang'ata Road has both community and neighborhood malls as the area serves population segments from both lower and upper middle income classes. The average rent for the area was Kshs. 171 per SQFT with average occupancy rate of 81.8% and a yield of 8.7% 42
Performance by Nodes Nairobi Eastlands was the worst performing submarket with average yields of 6.1% Mombasa Road Malls in Mombasa road have an average occupancy of 68.8% but low yields of 8.3% compared to other regions like Karen and Kilimani, Kileleshwa & Lavington due to it zoning as an industrial zone as well as traffic jams which tend to discourage footfall Thika Road Thika Road has all types of malls, i.e, neighborhood, community and regional with community malls taking the bulk of the share. The average yields plummeted to 8.7% from 10.0% in 2016, attributable to an increase in malls within the node resulting in low occupancy levels in some malls such as Juja City and Unicity malls Nairobi Eastlands Nairobi Eastlands remained the poorest performer with average yields of 6.1% and occupancy rates of 61.8%. This could be attributed to low occupancy rates as the formal retail sector faces stiff competition from informal retail outlets that are more popular with the lower middle and low income classes Satellite Towns Satellite towns maintained a high occupancy rates of 82.5% as they tend to serve one mall per town. However, the average rental yield was low at 7.7% compared to other areas along major routes like Thika or Ngong & Lang'ata Road. This is attributed to the low rent charged on the spaces due to their location and quality 43
44 B) Performance By Regions
Key Urban Centers Retail Market Performance Nairobi is still the best performing retail market with yields at 9.6% Location Rent 2017 Occupancy 2017 Retail in Kenya offers attractive returns of about 8.3% as compared to other sectors like residential which offers returns of up 5% - 7% Despite a drop down in performance, Nairobi was the best performing region, with average yields of 9.6%. This is attributable to increasing vacancy rates which averaged at 80.2%, a 2.7% points decline from 2016 s 82.9% as a result higher rents charged by malls in the City due to higher quality of retail spaces Rental yield 2017 Kisumu had average yields of 9.1%, a decrease of 0.3% points from last year s 9.4% yield. This could be attributed to increased supply in the market following the completion of Lake Basin Mall in 2016 Occupancy 2016 Yield 2016 Change in Occupancy Y/Y Change in Yield Y/Y Nairobi 185 80.3% 9.6% 89.3% 10.0% (9.0%) (0.4%) Kisumu 150 75.0% 9.1% 75.0% 9.4% (0.0%) (0.3%) Mt Kenya 136 80.0% 9.1% 90.0% 10.1% (10.0%) (1.0%) Mombasa 130 82.8% 7.3% 76.7% 7.2% 6.1% 0.1% Eldoret 96 83.3% 6.6% 83.3% 6.6% 0.0% 0.0% Average 141 80.2% 8.3% 82.9% 8.7% (2.7%) (0.4%) Eldoret had the lowest yield of 6.6%, which is due to the low rental rates charged within that market of on average Kshs 96 per SQFT, 44.2% lower than the market average of Kshs 172 per SQFT Source: Cytonn Research 45
46 C) Performance By Class
Malls Classification Shopping Malls are classified mainly according to size and number of anchor tenants A shopping Mall is a group of retail and other commercial establishments that is planned, developed, owned and managed as a single property, typically with on-site parking provided A shopping center will have a minimum retail gross lettable Area (GLA) of 20,000 SQFT Shopping Malls are usually classified according to occupancy, brands, tenants, achievements and awards, facilities, building materials, sizes and trade area size In our classification we have majored on classification by sizes and number of anchor tenants, and classified into three categories We classified malls according to the following criteria Type Size (SQFT) No. of Anchors Regional Center/ Destination 400,001-800,000 2+ Community Center 125,001-400,000 0-2 Neighborhood Center 20,000-125,000 0-1 Source: Cytonn Research 47
Malls Classification, Continued Destination malls are those with GLA of 400,000 SQFT 800,000 SQFT such as Garden City Destination malls in Kenya include Two Rivers, Sarit Centre and Garden City among others that attract international retailers and have large built up areas Mall Classification Neighborhood Community Destination Hazina Trade Centre Mountain View Mall Greenspan Capital Centre Spur Mall Two Rivers Mall K-Mall Red Heron Shujaa Mall Gateway Mall Juja City Mall Nextgen mall Ridgeways Mall Milele Mall The Point Highway Mall Crystal Rivers Garden City Ciata Maasai Mall Comesa Mall Tmall Nakumatt Meru Sarit Centre Rosslyn Riviera Nanyuki Mall Village Market Junction Mall Mtwapa Lavington Mall Cedar Mall Valley Arcade Greenhouse Mall United Mall Crossroads Mall Naivas Mall Yaya Centre TRM Mega City Prestige Plaza Mega Plaza Galleria The Mall Lake Basin Mall Zion Mall Mountain Mall West End The Hub Westgate City Mall Unicity Sky Mall Eldo Centre Tuff Foam Khetia Hse Ananas In Kenya only Nairobi has destination malls. This is attributable to the fact that Nairobi is the capital city, attracting both local and international consumers, hence high population as well as high consumer purchasing power Source: Cytonn Research 48
Malls Classification, Continued Kiambu and Limuru Road have the highest proportion of destination mall space in the market at 32.9% Nairobi Mall Distribution 35.0% 32.9% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 12.7% 12.7% 5.4% 11.2% 15.1% 5.7% 18.8% 7.9% 26.0% 16.6% 13.3% 6.5% 7.2% 11.3% 4.0% 13.9% 19.0% 17.5% 9.0% 9.7% 23.7% 0.0% Eastlands Karen Kiambu Road Kilimani Mombasa road Ngong Road Satellite Towns Thika road Westlands Neighborhood Community Destination From our sample size, neighborhood malls are the most common in Nairobi in 2017, accounting for 46.0%, followed by community malls at 43.0%,while regional/destination malls account for 10.0% of retail space in Nairobi area compared to 2016 where community malls accounted for 51.0% of the market share However, basing on mall space, Kiambu Road has the highest market share of destination malls with 32.9%, Thika Road has the highest market share of community malls at 19.0% while Ngong & Lang'ata Road has the highest market share of neighborhood mall space at 16.6% Source: Cytonn Research 49
Performance by Class Nairobi Metropolitan Area Destination malls have high average yields of 10.3% due to their popularity among international retailers, who pay prime rents for prime space Class Rent 2017 Occupancy 2017 Rental yield 2017 Occupancy 2017 Yield 2016 Change in Occupancy y/y Change in yield y/y Destination 234.4 77.3% 10.3% 94.0% 11.70% (16.8%) (1.4%) Neighborhood 159.5 82.9% 9.0% 88.0% 9.20% (5.1%) (0.2%) Community 170.8 76.9% 7.5% 85.0% 9.80% (8.1%) (2.3%) Average 171.2 79.8% 8.9% 88.9% 10.2% (9.1%) (1.3%) Destination malls have an average yield of 10.3% attributable to the high rental charges of on average 234.4 Kshs per SQFT 36.0% higher than the market average of 172 Kshs per SQFT The high rents are as the retailers are charged a premium for class on rent due to amenities provided and higher footfall in the malls as a result of presence of international retailers mainly as the anchor tenants Community malls register a lower rental yields of 8.7% mainly because of competition from retailers such as supermarkets and other small scale retailers. They also have fewer amenities as compared to destination malls Source: Cytonn Research 50
Performance by Node & Class Nairobi Metropolitan Area Regional malls have high average yields of 10.3% as they attract international retailers, hence increasing the mall footfall Kiambu and Limuru Road areas offers the highest yields for regional mall due to the presence high quality, newly completed international standards Malls with foreign retailers such as Carrefour On the other hand, Westlands offers the best returns for neighborhood and community malls at 13.2% and 14.2%, respectively with average occupancy rates of 92.5% and 85.0%, respectively as the area serves upper middle end population in neighborhoods along Waiyaki way such as Lavington, Parklands and Westlands and has relatively low competition from small scale retailers The area is also a major commercial zone with a commercial office market share of 23.7% further creating footfall for malls in the zones hence the high occupancy rates and returns Neighborhood Malls Community Malls Destination Malls Yield Occupancy Yield Occupancy Yield Occupancy Westlands 13.2% 92.5% 14.2% 85.0% 12.8% 100 Karen 13.1% 89.0% 10.3% 100.0% Kiambu & Limuru Road 10.5% 79.3% 7.9% 80.0% 13.4% 73.0% Kilimani,Kileleshwa & Lavington 10.5% 82.7% 9.9% 100.0% Ngong & Lang'ata Road 12.8% 100% 7.4% 75.7% Thika Road 9.4% 95.0% 7.9% 60.0% 9.4% 86.0% Mombasa Road 6.4% 65.0% 10.6% 80.0% 5.8% 50.0% Satellite Towns 6.8% 82.5% 9.5% 100.0% Nairobi Eastlands 5.7% 54.5% 6.5% 69.0% Source: Cytonn Research 51
Performance by Node & Class Key Urban Centers Nairobi and Kisumu offers the best yields for neighborhood malls at 9.7% and 87.5% occupancy rates Neighborhood Community Destination Region Occupancy Yield Occupancy Yield Occupancy Yield Nairobi 80.9% 9.7% 79.7% 9.3% 77.3% 10.3% Kisumu 87.5% 9.7% 66.7% 8.7% Mt Kenya 80.0% 9.1% Mombasa 98.4% 9.7% 75.0% 6.1% Eldoret 90.0% 7.0% 70.0% 5.8% Source: Cytonn Research Regional malls are only located within Nairobi, offering the highest yields of 10.3% Neighborhood malls in Nairobi and Kisumu regions have the highest the highest yields of 9.7%, and average occupancy rates of 80.9% and 87.5%, respectively, as consumers gravitate towards convenience when shopping, hence more demand for neighborhood malls which are mostly in residential neighborhoods 52
53 D) Retail Market Opportunity
Retail Space Opportunity - Kenya Yields, GDP Per Capita and contribution to current and upcoming supply were used for the rank The following criteria has been used for ranking retail space performance according to location and to find the most viable retail space opportunity: Retail Space Opportunity Criterion for Kenyan Cities/Towns Yields 4-6.5% 6.5%-9% >9% Points 1 2 3 GDP per Capita in Kshs 200-500 501-800 >801-1100 >1100 Points 1 2 3 4 Current Supply /Total Supply < 10% 10%-30% > 30% Points 3 2 1 Upcoming Mall Supply /Total Supply < 6.0% 6.1-10.0% >10.0% Points 3 2 1 Source: Cytonn Research 54
Retail Space Opportunity - Kenya Mombasa is the best investment opportunity for mall developments in the country Region Yield Current Supply/Total Supply GDP/Capita Upcoming supply/total Supply Weight 0.2 0.3 0.2 0.3 Weighted Score Rank Mombasa 2 3 3 3 2.8 1 Kiambu 2 3 4 2 2.7 2 Machakos 2 3 3 2 2.5 3 Mt Kenya 3 3 2 2 2.5 3 Kajiado 2 3 4 1 2.4 5 Uasin Gishu 2 3 2 2 2.3 6 Kisumu 3 3 2 1 2.2 7 Nairobi 3 1 3 1 1.8 8 Mombasa and Kiambu regions offer the best investment opportunity to mall investors, due to their low supplies in mall space, both existing and upcoming Nairobi was the worst market to invest in country wide owing to its current large supply which accounts for 59.4% of the country s total supply while also accounting for 49.7% of the upcoming supply in Kenya, indicating that the capital has sufficient supply of retail space Source: Cytonn Research 55
56 V. Market Sentiments
A) Retailers Sentiments on the Market 57
Current State of the Retail Market Players believe that there is increase in demand for convenience and thus retail must adjust towards embracing online platforms We conducted a survey among top management of major retail chains to get their sentiments on the market and the results are as follows: Situation Sentiment Forecast on new trends/activities in retail market Increased use of technology hence supporting online retail Key industry players believe that the retail market is on a high growth path, however facing competition, attributable to international brands Increasing demand for convenience and thus retail must adjust towards embracing online platforms Increase in purchasing power due to growth of middle class Rise of estate retailers hence decrease in malls footfall Increased retailers and partners in business both local and international brands Increased use of social media to boost sales/online business Great potential for innovation The retail industry is on the rise though there is intense competition which can be attributed to international entrants They believe that there is an increase in demand for convenience and thus retail must adjust towards embracing online platforms There is potential for growth of retail sector due to increase in purchasing power, basing it on growth of middle class 58
Strategies Being Applied for Growth Aggressive marketing is the key strategy being applied by retailers in the medium and short term Situation Sentiment Aggressive marketing, specialization and promotions for loyal customers like use of loyalty cards Timely payment of distributors Good management, customer satisfaction and product diversification Good customer service Strategies being employed for growth/ survival in the short term and long term Offering variety products to the clients Embracing social media marketing Fair pricing/ home and office delivery Closing high net worth deals in low seasons and single sales in the short term Exploring strategic partnerships and also considering possibility of franchising Pricing goods at reasonable prices & maintaining good relations Rebranding Retailers are mainly focusing on client retention through pricing, customer service, and product differentiation in the short term They are also focusing on organic growth, through partnerships and franchising in the medium term and online marketing is also a key target area for developers in the medium term 59
Preferred Product Lines Food and lifestyle products are the most preferred items in retail stores Situation Preferred Product Lines Sentiment FCMG Electronics Food products Lifestyle products Construction materials The most preferred products in the Kenyan retail space are food and lifestyle products Increased demand for food products has seen retailers increase the range of food products from labelled pastries to currently fully operational cafes with sitting space in most of the retail stores The demand for lifestyle products such as clothes, accessories, watches, perfumes and foot wear is being driven by the increase in the disposable income among the middle class as well as changing lifestyle and peer pressures The above factors are not expected to change and hence we expect further an increase in demand for this products and hence an increase in the overall retail market in Kenya 60